‘Medicare for All’ Is Hammering Health Care Stocks. For Now.

UnitedHealth Group has been a stock market darling for much of the past decade, dependably churning out earnings increases and rewarding shareholders with staggering returns.

Its latest quarterly report, issued on Tuesday, was superb, as expected. Earnings per share jumped 24 percent. Based on the news about the diversified health service company’s fundamental businesses, you might have expected its stock price to rise.

Nope. UnitedHealth’s share price dropped 4 percent that day and almost 2 percent the next. And, along with much of the health care sector, it has been on a downward trend for the past few months.

What’s wrong with the stock? It has nothing to do with the company’s short-term profit outlook, which is splendid. But like other health care companies, UnitedHealth is confronting a major political problem: the ascendance of “Medicare for All” as a lodestar for the Democratic Party.

Medicare for All isn’t a new idea. It may be defined, basically, as universal health insurance under a single government-run, taxpayer-financed plan. It would certainly alter, and probably limit, the role of private health insurance companies like UnitedHealth. Senator Bernie Sanders of Vermont has supported the idea for years. But it wasn’t much of an issue for investors because it never went anywhere in Congress.

Now, however, Mr. Sanders is the front-runner among the announced aspirants for the Democratic presidential nomination. What’s more, he appears to have moved the entire political conversation into territory that is exceedingly uncomfortable for health care companies.

When he introduced a new version of his Medicare for All legislation in the Senate on April 10, the stock market noticed that his co-sponsors included at least four Senate Democrats who are also running for president: Kirstin Gillibrand of New York, Cory Booker of New Jersey, Elizabeth Warren of Massachusetts and Kamala Harris of California.

It’s far too early to divine whether Medicare for All — particularly a version that bans or severely limits private insurance — has even a modest chance of coming into existence after the 2020 election. Even now, amid all the hoopla, the odds may not be propitious.

The current Democratic leaders in Congress — Senator Chuck Schumer of New York, the minority leader, and Nancy Pelosi of California, the House speaker — have not supported it. President Trump and Republican leaders in Congress have been demanding a smaller government role in health care, not a larger one. And the giant health care companies, which have enormous wealth and influence, are, for the most part, committed to blocking the idea.

But that hasn’t stopped the stock market from acting as though Medicare for All were just around the corner.

In a note to clients on Wednesday, Stephen Tanal, a Goldman Sachs analyst, said that fear of government intervention would probably weigh on health care share prices “perhaps until the presidential election itself.” Because many of the companies’ current business models are solid, he added: “It seems likely to us that the trough should occur well before the November 2020 election — assuming, of course, that the market likes the ‘signposts’ that occur between now and then — specifically, in this case, the ‘spot’ probability of single-payer policy that would actually ban the sale of private health insurance.”

For the moment, though, as Democratic candidates embrace Medicare for All, the stock market is shunning health insurance companies like UnitedHealth, Anthem, Centene, Cigna and Humana. Hospital groups like Tenet Healthcare and HCA Healthcare have been caught in the downturn, too, under the assumption that their revenue could be squeezed if the federal government is the country’s “single payer.”

Comments by David Wichmann, UnitedHealth’s chief executive, during an earnings call on Tuesday, appear to have focused market attention on the issue, which made matters worse. He began his prepared remarks to Wall Street analysts with a direct attack on Medicare for All.

“The wholesale disruption of American health care being discussed in some of these proposals would surely jeopardize the relationship people have with their doctors, destabilize the nation’s health system, and limit the ability of clinicians to practice medicine at their best,” he said. “And the inherent cost burden would surely have a severe impact on the economy and jobs, all without fundamentally increasing access to care.”

After his remarks, the company’s shares plunged, and the decline spread to other companies.

Data from Bespoke Investment Group shows that the damage to health care stocks became much more acute on Tuesday and Wednesday. On those days, according to Bespoke, the health care sector, dominated by UnitedHealth, underperformed the S&P 500 by its widest margin since April 2009. Investors’ aversion to health care stocks was far greater than it was for any other market sector, using a common measure: the degree to which its share price has dropped below its 50-day moving average.

The difference, or spread, between the market’s aversion to health care stocks, the most-hated sector, and its attraction to financial services, the most-loved, was extraordinarily wide. The polarization was greater than it has been for 99.93 percent of all trading days in the American stock market since the start of 1990, Bespoke found. When such extremes in market sentiment have occurred in the past, the depressed sector has rarely bounced back quickly, Paul Hickey, a Bespoke founder, said in an interview.

“When momentum is this extreme, it often takes some time to recover,” he said.

A Bloomberg article compared the rout in health care stocks to the “‘Dark Days’ of the Financial Crisis,” when, in addition to the crisis afflicting the overall stock market, the sector grappled with uncertainty over what, eventually, became the Affordable Care Act, a.k.a. Obamacare.

But as I’ve written, the Affordable Care Act turned out to be a boon for managed care companies, which profited handsomely despite continuing to gripe about the government’s expanded role.

In the 10 years through March, for example, UnitedHealth’s shares returned 1,345 percent, including dividends, dwarfing the 376 percent total return for the S&P 500. UnitedHealth trailed Apple’s total return of 1,593 percent and Amazon’s, 2,649 percent, but it was far better than Google (now a unit of Alphabet) at 596 percent.

At some point, stocks that fly that high simply drop in value. For health care stocks, this may just be one of those times.

But if profits for major health care companies remain strong, as expected, their share prices could begin to stabilize. And if the presidential cycle starts to shift in their favor, they could resume their path upward.

It’s even possible that many health care companies, which already do extensive government business, could find ways of prospering under some version of Medicare for All, especially one that reserves a substantial role for private companies.

It has been an awful stretch for health care stocks. But it would be foolish to underestimate the companies’ ability to adapt under duress and to ultimately profit, no matter who is in power.